Massive Deficit Spending to Hurt Nation’s Poor

In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding.

That amount is also roughly equal to $29,000 for every man, woman and child in the U.S. For a family of four – about $116,000. In other words, my family is on the hook to Uncle Sam over the next ten years an amount equivalent to a three bedroom condo.

The article also includes this curious line:

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession.

Umm, how can the economy be climbing out of recession as it shrinks? The definition of a recession is a contracting economy.

At any rate, what do the massive deficits mean? The most likely scenario – inflation. As Henry Hazlitt noted in this article:

Given a budget deficit, however, there are two ways in which it can be paid for. One is for the government to pay for its deficit outlays by printing and distributing more money. This may be done either directly, or by the government’s asking the Federal Reserve or the private commercial banks to buy its securities and to pay for them either by creating deposit credits or with newly issued inconvertible Federal Reserve notes. This of course is simple, naked inflation.

We’ve already seen the Fed embark on a dangerous inflationary tear over the last year and a half or so, with some measures of the money stock doublingin the course of less than a year. The resulting sharp increase in aggregate prices has yet to be felt because the money is remaining in bank reserves due to their reluctance to lend. As the economy eventually does recover and banks begin to unleash all of that new money into the economic system – watch out.

Add to this the scenario of the Fed “monetizing” the government deficits with even more money, and the results could be devastating. Inflation, of course, hurts the poor the hardest as they are least positioned to have their wages keep up with rising prices (those on fixed incomes are also disproportionately harmed).

The other option to finance deficits is through the government selling bonds, being bought by the private sector’s real savings. This government borrowing crowds out private, productive investment opportunities and thus stunts economic growth and harms overall welfare. Slower growth means fewer job opportunities and depressed wages, which of course harms the poor dispraportionately as they are on the margins of employment.

Progressives liken themselves as champions of the poor, but then applaud Keynesian deficit spending policies that end up hurting the poor.

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